In December 2021, in a no-action letter to FINRA, the SEC staff confirmed it was breaking with a long-standing interpretative view by applying Rule 15c2-11 under the Exchange Act to fixed-income securities (“FI”), including high-yield debt securities issued for resale pursuant to Rule 144A. The application of Rule 15c2-11 to FI securities potentially creates new public disclosure obligations for non-reporting issuers.

Rule 144A provides a safe harbor from registration for resales of securities to qualified institutional buyers¹. While, Rule 144A transactions are generally conducted with a disclosure document subject to antifraud protections under the Securities Act, the indenture reporting obligations for a private for life issuer are generally less robust than SEC required reporting. Strictly speaking however, Rule 144A requires only that certain limited issuer information be available “upon request”². Private for life issuers usually maintain a secure password-protected website for current and prospective note investors and practitioners generally view this practice as satisfying the Rule 144A “available upon request” requirement.

Rule 15c2-11 governs the quotation of securities in the over-the-counter market and requires, among other things, that broker dealers perform certain diligence of covered issuers before publicly quoting their securities. In contrast to the available “upon request” regime of Rule 144A, Rule 15c2-11 requires broker dealers of applicable securities to review certain issuer information (which is generally co-extensive with what Rule 144A requires³) and confirm such information is available to the public. By requiring issuers to make information public in order for their 144A securities to be quoted by broker dealers, the Staff interpretation could effectively impose additional public disclosure requirements on private issuers.

A New Compliance Regime for Rule 144A Fixed-Income Securities

In connection with the recent interpretation, SEC staff announced it would implement a new compliance regime over three phases. The first phase of Rule 15c2-11 compliance, which applies from January 3, 2022 to January 3, 2023, excludes several categories of FI securities, including FI securities sold pursuant to Rule 144A. The second phase runs from January 4, 2023 to January 4, 2024 and applies to Rule 144A FI securities while excluding certain other FI securities, such as those issued by foreign governments, banks and bank holding companies or credit unions. The final phase, which has no end date, commences on January 5, 2024 and applies to the same categories as Phase 2 but excludes from compliance only foreign debt FI securities, FI securities guaranteed by a foreign government and FI securities quoted on a medium with a direct link to a website with current and publicly available information about the issuer.

Implications

The SEC’s interpretative change is being vetted by securities industry professionals who are concerned that the application of Rule 15c2-11 to Rule 144A high yield debt securities of non-reporting issuers will cause such issuers to avoid the high yield debt market rather than be potentially required, in order for broker dealers to be able to provide quotations in such securities, to publicly disclose information they prefer to keep private or disclose only upon request by investors.

¹ Defined in Rule 144A under the Securities Act as, among other things, institutional investors that own or manage on a discretionary basis at least $100 million worth of securities.
² Under Rule 144A(d)(4)(i) this information includes a brief business description, balance sheet and profit and loss statement for the most recent and preceding two fiscal years which only need be audited “to the extent reasonably available”.
³ See Rule 15c2-11(b)(5).

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